N.Y. Producer Groups Sue To Derail Compensation Disclosure Regulation

Insurance Regulation 194–scheduled to take effect on Jan. 1, 2011–requires producers to disclose certain information about their compensation to all clients, regardless of whether the clients have asked for it, the litigating groups said.

"Should any client request more information, the regulation requires the producer to provide detailed information about their compensation for the policy sold and the compensation they would have received had the client chosen a different policy," the producer groups added.

Matthew J. Gaul, deputy superintendent for the department, said he is "disappointed" the two producer groups "elected to take this route," adding that reporting requirements in the regulation are minimal.

He observed that "since 2004 [broker groups] have claimed [transparency] is their position. Why are they fighting? Why litigate? What is it brokers are trying to hide?" He also pointed out that consumer groups, such as the Risk and Insurance Management Society, are asking for more disclosure than the proposed rule requests.

He said the department would "vigorously defend the superintendent's authority" on the proposed requirements.

The department, he said, has for years worked with industry groups on the regulation and has drastically lowered reporting burdens to a minimum.

Meanwhile, last week's announcement about the lawsuit prompted a further clarifying statement from the Professional Insurance Agents of New York State, which declined to participate.

"This lawsuit was announced back in February. Knowing that litigation would be undertaken, PIANY carefully and seriously considered the role it should pursue on behalf of the producer community," PIANY President Kevin Ryan said in a statement.

"Our commitment against mandatory disclosure is unwavering. Confident that the suit will ultimately be decided in court, PIANY will continue our equally important, ongoing effort of addressing compliance rules regarding Regulation 194 in ongoing discussions with the NYSID."

The statement continued that in the event the regulation does take effect at some point, "Main Street agents and brokers will have had the benefit of a strong, persuasive voice shaping how producers can fulfill the requirements with as little disruption to their business as possible."

PIANY said earlier this month it is negotiating with the insurance department over difficulties its sees with the regulation. PIANY also said it has brought back its Agent and Broker Compensation Disclosure pages on its website, www.pia.org/comm/abcd.

The action launched by IIABNY and CIBGNY–known as an Article 78 proceeding–asks the court to annul parts or all of the regulation. In its court filing, the groups asserted that:

o The insurance department does not have authority under New York law to mandate compensation disclosure.

o The regulation "represents an impermissible attempt to rewrite the Insurance Law on a subject as to which the legislature has already specifically legislated."

o Parts of the regulation "impose massive and unwarranted costs of compliance on brokers so as to constitute an arbitrary exercise of regulatory power."

o The regulation violates producers' rights to due process and equal protection under the U.S. and New York State Constitutions.

Anticipating that the court proceeding might not conclude before the regulation's scheduled effective date, IIABNY on May 13 sent the department a proposal for specific language that a producer could use for making the required initial disclosure. (For more on this proposal, see http://bit.ly/aDxlfL.)

IIABNY–which noted that it had called on insurance agents and brokers back in 2004 to "voluntarily disclose to their clients the existence and nature of all their compensation"–has opposed mandated disclosures as "burdensome for producers and of little benefit to consumers."

The board of CIBGNY voiced similar concerns. Both groups testified at hearings on the subject conducted by the Insurance Department and the New York Attorney General's Office during the summer of 2008, arguing that such a regulation is "unnecessary" and "would not be in the best interests of either consumers or producers."

IIABNY and CIBGNY were part of an industry effort throughout 2009 aimed at convincing the New York Insurance Department to "drop Regulation 194 or minimize its burdens on producers."

"While standing up to protect producers' businesses, the industry group hoped to keep the dispute out of the courts," the two producer associations said. "However, after the department adopted the final version of the rule last winter, IIABNY and CIBGNY announced their plans to take legal action, the only producer groups to do so."